How To Pick The Right Strike Price of a Call Option

Knowing how to pick the right strike price is crucial to profitable options trading.

Right options are liquid options that you can sell to lock in your leveraged profit after the stock price has moved in the anticipated direction.

Best strike prices for CALL options are strike prices that are slightly above(in the money) or slightly below(out of the money) the current stock price. You can use slight in the money for good returns(still way better than stocks!) or for a little more ambitious/more speculative you can choose slight out of the money.

Deep in the money is playing more conservative but it costs more and the price appreciation is higher while the # of contracts you can buy for the same investment is lower. You can expect just decent returns. Deep out of the money is like playing a jackpot. Most of the time these options expire worthless.

Lets review how to determine the strike price of a call option in more detail. Below is a rough guide with reference to an options table that you might find useful.

[Call Options. Strike Price Formula]  Note: 'In the money' can be a few strikes above 'At the money'
Strike Price Return Risk of Loss/Time Value Decay Cost Thoughts
Deep In the Money Lower Lower Current Stock Price > Strike Price Expensive
Somewhat Deep In the Money
Somewhat Deep In the Money
In the money Good Average Current Stock Price > Strike Price Average A Decent Pick for Beginners
At the money Good Average Current Stock Price = Strike Price Average
Out of the money Good/High Average/High Current Stock Price < Strike Price Cheaper
Somewhat Out of the money
Somewhat Out of the money
Deep Out of the money Very High Very High Current Stock Price < Strike Price Very Cheap

Higher Open Int(option contracts open) and Volume(actively trading) should give you a clue as to what strike prices investors are actively involved in.

Here's a general SHORTCUT for finding PROFITABLE Call options for stocks expected to go UP.

"Buy slight in the money Call options of high volume, high capitalization major stocks and choose the right expiration date!"

What is the right expiration date? A date that gives the stock ample time to make the anticipated move and the anticipated move occurring in the right direction with a high percentage change that will offset any time decay.

For events such as the Earnings event, place a Weekly Call option(see section Weekly Options from the left menu) Except in the following circumstances
  • The Earnings event is on the 3rd week. In this case, you'll still have to go with placing a Standard Call Option since Weekly options are not offered during the 3rd week
  • Weekly options are not offered on the stock. In this case, you have no choice but to place a Standard Option

If you anticipate a modest but strong enough move happening in the next month or two that might even get postponed to 3 months, buy a Standard option with an expiration date 3 or 4 months away to give it ample time to make the move. Remember the time decay is fastest in the last 60 days and speeds up even more in the last 30 days. Only buy 1 or 2 months options if you're expecting a sharp enough move soon, that will offset the fast time decay. Use leaps(long-term options) if you're certain that the stock price will rise eventually but are not sure about the timing, have extra cash and won't be closing the position anytime soon. Also if you have a leap option and the stock has already made the anticipated move, you can try to place an order to sell to close to check if you will be able to sell the option at all or at a favorable price without pressing the final submit order button. This covers both short-term and long-term options.

Note: If the Standard Option is too expensive for you, you can try buying Mini Options. See the link on the left Menu for Mini Options
In Summary, knowing how to pick the right strike price of an option is a must for placing profitable call options thus need to be given top priority.

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